Monday, January 06, 2014

John Cook considers the question of whether to
delegate and shows that it is both more interesting and more complicated
than it looks:

Comparative advantage is often illustrated by a hypothetical lawyer
and an assistant. A lawyer who can type very quickly is still better off hiring
someone else to do the typing because he can make much more per hour practicing
law. If he could type twice as fast as an assistant, and he could earn more
than twice as much practicing law as it costs to hire an assistant, he makes
money by delegating.

This illustration makes sense at one level, but it also sounds a little quaint.
In fact lawyers do quite a bit of typing. That's explained by another
economic idea: transaction costs. It costs time to recruit and hire an
assistant. And once you have an assistant, it takes time to explain what you
want done, time to wait for the work to come back, time to review the work,
etc.

Highly paid executives type their own emails, at least some of the time,
because it's not worth the transaction costs to have someone else do it. But
for a larger task, say typing up hundreds of handwritten pages, it's worth
paying the transaction costs to get someone else to do the typing.

Not only do many executives type some of their own emails, they probably do so
out of common sense, and without really thinking about it. Sometimes, though,
it pays to take the time to understand explicitly what many understand only on
an intuitive level. I am sure there are lots of people who nail this exception
to the Law of Comparative Advantage without having heard of it or even knowing
what "transaction cost" means. Such people may therefore fail to recognize other
situations in which a similar analysis applies.